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2 Small-Cap Names With Big Potential

Having patience can mean the difference between average and outperformance.
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The opportunistic investor is one who has the fortitude to go against conventional wisdom because data and reasoning suggest it is prudent to do so. Avoiding the Nifty-Fifty stock back in the 1970's, buying tech stocks after the Internet bubble burst in 2000, and buying bank stocks in 2009 and 2010, are all examples. The end result is almost always the same -- substantial long-term investment gain or avoidance of permanent loss of capital.

Canvassing the investing landscape today, there are areas, ideas -- both big and tiny -- that bear watching.

For those that like micro-cap stocks, educational toy maker LeapFrog (LF) is a perfect candidate to keep an eye on. Sales are a mess and declining at a rapid rate, and losses are mounting. But what you have today is a company with a market cap of $50 million, current assets of $200 million, and total liabilities of $76 million. In other words, net-net current assets -- or the value of liquid assets that can be converted into cash after all liabilities are deducted -- is $125 million: more than twice the current market cap as of September 30.

To be sure, the net-net value has been declining over time, but in this week's earning's release, the company announced that it is exploring any and all alternatives for the company. It will be interesting to see what develops, here.

And then there's the oil patch. I've said my piece on this industry, but in summary: it's going to take a long period of cleansing, but in the end those left will face a less-competitive landscape.

Then there are companies like EXCO Resources (XCO) ¿ which is now trading for $1 a share, and has recently done some very interesting things. First, the company put in a new CEO that has experience fixing situations like this. Second, the company has recently done an excellent job of restructuring it's debt. As a result, some savvy investors, such as Prem Watsa and Howard Marks, continue to believe in the company. It is contemplating a reverse stock split that, for what it's worth, would at least allow institutional money that is barred from owning stocks trading for less than $5 a share have a bite.

Time will always tell. The role of the investor is to focus on what is going to happen, not what has already happened. And having the conviction and patience to wait until tough times get better is that small difference between average and outperformance.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider LF to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Gad was long LF and XCO, although positions may change at any time.